Congress, IRS, Acting More Charitable for a Change, CCH Notes
(RIVERWOODS, ILL., February 15, 2010) – Taxpayers have until the end of this month to make a cash charitable donation for Haiti earthquake relief and deduct it on their 2009 return, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). This is an exception to the rule that a charitable deduction can only be taken for the tax year in which the donation takes place.
“This kind of exception was made once before, when contributions for relief following the Indian Ocean tsunami made early in 2005 were allowed as a deduction on 2004 returns,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “The contribution has to be in cash, although that includes donations made by check or credit card, and it must be made by February 28 to be deductible on 2009 taxes.”
While deducting eligible contributions on 2009 returns gives a quicker tax benefit, deducting the contributions on a 2010 return, which is perfectly permissible for any contribution made in 2010, may give a larger benefit.
“For 2009, high-income taxpayers can lose some of the value of their itemized deductions,” Luscombe observed. “For 2010, that potential limitation doesn’t apply, although it may be reinstated for 2011 and future tax years.”
An Exception on Substantiation
The new law also makes an exception to the normal rules for substantiating a charitable deduction. Since 2006, every deduction for a cash contribution (which includes contributions made by check and credit card) of any amount has had to be substantiated by a bank record such as a cancelled check or by something in writing, such as a receipt or letter from the donee indicating the name of the donee organization, the date the contribution was made and the amount of the contribution.
Instead, individuals who make a cash contribution for Haiti earthquake relief through their cellular telephones via text message can substantiate it with their telephone bill, rather than a document from the charity. The telephone bill must show the name of the charitable organization, the date of the contribution and the amount of the contribution.
The exception indicates that Congress may have made the law for some cash contributions too restrictive, with the language of the statute denying a deduction for contributions that are clearly legitimate and verifiable. The IRS has already said that it will accept payroll records and pledge cards as substantiation for charitable donations made through payroll deductions, even though these don’t meet the exact requirements of the new law.
“Perhaps the exception made for Haiti earthquake relief will be expanded to other situations in which there is a third-party record that a donation has taken place, even though the record comes from a store, not the charitable organization, such as donations to literacy programs or food pantries made by adding a few dollars to your bill at the bookstore or grocery.” Luscombe said. “This may come through an IRS ruling or from clarifying legislation, but I think it will come one way or another.”
Substantiation Requirements Pile Up
In recent legislation, the trend has been for Congress to add requirements for taxpayers to prove the legitimacy of their charitable deductions.
Since 2004, the law has required that you have a receipt for any donation of property valued at more than $250.
Since 2005, taxpayers who give a car valued at over $500 to a charity have had to meet stringent substantiation requirements. They must obtain a form from the charity identifying them as the donor and list their Social Security Number and the vehicle’s identification number. The taxpayer is required to attach this statement to his or her return. If the charity sells the vehicle without using it or fixing it up – which is the most common practice – the statement must also certify that the vehicle was sold in an arm’s length transaction between unrelated parties, list the gross proceeds and state that the deduction may not exceed the gross proceeds.
“There was a strong suspicion that people were greatly inflating the value of cars they donated to charity, claiming the top Blue Book price for clunkers that had to be towed away,” Luscombe observed.
In 2006, the Pension Protection Act tightened the rules again. Donations of any household items or clothing made after August 17, 2006, won’t qualify for a deduction unless the items are “in good used condition or better” or the donation includes a deduction for a single item with an appraised valuation of more than $500.
“An expensive designer dress might qualify even if it has a rip,” Luscombe said. “But in general, you can’t claim a deduction for things that are going straight to the rag bin. The interesting question is just how the IRS will define good used condition or better.”
What Counts, What Doesn’t
The recent tightening of substantiation requirements comes on top of a number of long-established rules limiting what counts as a charitable donation.
You cannot deduct any contributions made to specific individuals, political organizations or political candidates; the value of your time or services; tuition costs or the cost of raffle tickets. If you buy a lot of raffle tickets, however, you may be able to claim a deduction for gambling losses. (But, you can only deduct gambling losses to the extent of your gambling winnings.)
What Organizations Qualify?
Giving to a worthy not-for-profit organization doesn’t necessarily mean you can declare a deduction. To be deductible, contributions must be made to qualified organizations. These are organizations to which the IRS has granted 170(c) status and usually include charitable, religious, educational, scientific and literary organizations.
Contributions made to other not-for-profit organizations, such as trade associations, labor unions, political parties, civic leagues and hobby clubs cannot be deducted as charitable contributions. For those unsure of whether or not the organizations they have donated to are “deductible,” the IRS posts a listing on its web site of all organizations that have 170(c) status.
“A charity that operates exclusively overseas will not qualify, but many international charities have a U.S. affiliate that does have 170(c) status,” Luscombe said.
Time, Travel, Lodging
Although you cannot deduct the time you devote to a charity, you can deduct the expenses you incur while contributing your services to a qualified organization. For example, if you use your car to deliver meals to the homebound, you can deduct your mileage.
On 2009 and 2010 returns, auto expenses for transportation related to charitable work can be claimed at 14 cents per mile.
Other expenses that can be deducted include out-of-pocket expenses and transportation costs, meals and lodging while away from home. However, travel costs may only be deducted if there is no significant amount of vacation time taken in conjunction with your charity travel. You need to keep records, and, if the expenses are more than $250, get an acknowledgement from the charitable organization.
Benefit from Donating Appreciated Property
When donating qualified stock and other assets, such as real estate that has appreciated, you can deduct the fair market value as opposed to what you initially paid for the asset.
“By making charitable donations from their stock portfolios, taxpayers can take a deduction based on the current value of the stock and avoid the capital gains taxes they would have to pay if they sold the stock,” Luscombe noted.
When You Get Something of Value
If in return for a contribution you receive goods or services, such as a dinner, theater tickets or a golf outing, you can deduct only the amount that exceeds the fair market value of the benefit you received.
For example, if you contributed $100 to attend a charity fundraiser banquet, you can only deduct the amount that exceeds the actual cost of the meal provided. Therefore, if the fair market value of the dinner was $35, you can only claim $65 as a charitable contribution.
If your contribution to a charity has a value in excess of $75, and you get something substantial in return, the organization is required to provide you with a written disclosure statement. This statement should state the value of the goods or services the charity provided and the amount you donated that is deductible on your federal income tax.
An Opportunity for Seniors
A special opportunity for some seniors to avoid paying income tax on distributions from IRAs expired at the end of 2009. Since most IRA distributions are taxable, and since they must begin, in specified amounts, when an IRA owner reaches age 70½, some seniors find that they have to pay tax on income that they don’t really need.
They can avoid the tax by making a distribution of up to $100,000 directly to a charity. They can then exclude the amount of the distribution from their income.
“It’s very much as though the distribution never took place, from a tax perspective,” Luscombe explained. “The charity gets the money, but the distribution is not counted as income. It doesn’t get taxed, and it doesn’t increase the taxpayer’s adjusted gross income, which can lead to further tax benefits.”
The law doesn’t allow a double benefit – you can’t exclude the distribution from your income and then also take an itemized deduction for it. The big question that hangs over this new tax provision is whether it will be renewed for 2010.
“Charities will no doubt urge that this be made a permanent part of the tax code, but it seems to give a tax break to people who almost by definition don’t need the money from their IRA distributions,” Luscombe noted. “It may, however, be renewed along with other popular provisions, for another year.”
Other Ways to Give
While writing a check to a favorite charity and taking a deduction for it is the simplest way of benefiting your favorite cause and limiting your tax liability, there has been an increase in recent years of using intermediate vehicles that offer more benefits, or more flexibility, while achieving the same purpose.
Charitable remainder income trusts allow individuals to set up a trust naming a charitable organization as the beneficiary. Under the trust, you receive the interest income during the remainder of your life, while the charity receives any remaining income you did not withdraw during your lifetime as well as the principal when you die.
“Rather than waiting until after your death to leave money to a charity, these trusts offer you a lifetime use of the property, but allow you to declare a charitable deduction for the present value of the charitable interest,” said Luscombe.
Donor advised funds offer similar benefits, but instead of donating directly to a charity, you place your money in a fund. You can then advise the fund to make distributions to charities of your choosing, or offer advice as to how the funds are invested.
“There has been some concern about donor advised funds being used to benefit family members, among other things, and last year’s legislation contained some new restrictions on them,” Luscombe noted. “People interested in vehicles such as charitable trusts and donor advised funds should consult with a competent tax advisor before they make the significant financial commitment that is usually required.”
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CorpSystem®, CCH® IntelliConnect™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal, and regulatory sectors. Wolters Kluwer had 2008 annual revenues of €3.4 billion, employs approximately 20,000 people worldwide, and maintains operations in over 35 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Visit www.wolterskluwer.com for information about our market positions, customers, brands, and organization.
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